Companies operating their economic activity in the Czech Republic have a number of statutory obligations in the course of the year. For some of them, reporting and other obligations are even more complicated, if they belong to a group of companies or they hold the position of a parent company. One of the areas, which parent companies should not neglect, is monitoring the amount of overhead (indirect) costs related to holding a stake in a subsidiary. This is due to the obligation of the parent company to assess the costs (expenses) related to holding a stake in a subsidiary, when preparing the corporate income tax return, as tax ineligible costs in compliance with the stipulation of article 25 paragraph 1 letter zk) of act no. 586/1992 Coll., on income taxes.

For the purposes of this stipulation, the potential overhead (indirect) costs relating to holding a stake in a subsidiary are limited by the amount of 5 % of income from profit sharing paid by the subsidiary, unless the company proves that the actual amount of these overhead (indirect) costs is lower. In this context, we would like to point out that according to the above-mentioned stipulation, it is the company, not the tax administrator, that needs to prove the actual amount of overhead (indirect) costs and also to identify these costs in a credible way, calculate them and substantiate them with the respective documents.

The Supreme Administrative Court of the Czech Republic (hereinafter the “SAC”) has confirmed this fact, too, it its decision with file no.: 3 Afs 170/2019 – 27 from 11 January 2021, in which it dealt with the issue of demonstrability of the actual amount of overhead (indirect) costs related to holding a stake in a subsidiary. In the recital, the SAC states the following:

• “The law thereby basically stipulates two options: either (a) the taxpayer proves the actual amount of overhead costs, or (b) (if he does not prove it) these costs will be determined by flat rate in the amount of 5 % of the income from profit sharing paid by the subsidiary. In the other situation mentioned, the taxpayer no longer proves the actual amount of overhead costs.”
• „From the table presented by the complainant (note: a table with the calculation of overhead costs presented by the taxpayer), the Supreme Administrative Court verified that neither the economic reasons that led the lady to determine this sum nor any other evidence that would certify the proving of overhead costs in this amount, follow from it. The table presented by the complainant actually cannot even be called a “calculation” in the sense that while the result of the calculation is clear from the table, its individual steps are not evident from it.”
• “The obligation of claiming (“calculating”) the actual overhead costs cannot be separated from the obligation of supplying the respective evidence for it. The obligation of “proving” inseparably combines both of these elements.”
• “Beyond the necessary, the Supreme Administrative Court agrees with the regional court, which expressed a certain understanding in the challenged judgment for the practical difficulties, which the proving of actual overhead costs related to holding a stake in a subsidiary generally presents to taxpayers. It said it was aware of the “complexity and often impracticability of precisely proving the amount of overhead costs, as this requires and puts high demands on the taxpayers in terms of the requirement of precise documentation and resolving of the individual costs in relation to the parent company and the subsidiary.” Although the Supreme Administrative Court shares this opinion and adds that due to the nature of the matter, it will not be possible to calculate the absolutely precise amount of the actual overhead costs, it will, however, usually be necessary to create a certain reasonable algorithm for their calculation. This algorithm must reflect all costs relating to supporting organisational processes related to holding a stake in the subsidiary, however.”
• “The Supreme Administrative Court disagrees with the regional court, though, in the assessment that the statutory five-percent flat rate for costs can “certainly be considered still reasonable” - “the reasonability of a rate set in this way will always depend on the specific circumstances and not infrequently, a situation may occur, when this rate will be considerably higher than the actual costs (and thus actually “unreasonable”). It is then the responsibility of the taxpayer to duly calculate and prove these costs and thereby avoid application of the flat rate.”
  
  

Following the above, it is possible to summarise that a sufficient amount of evidence and due calculation of the costs of the parent company relating to holding a stake in a subsidiary should be an important part of the records of the parent company, in case it decides not to determine these costs (“by means of a flat rate”) as 5 % of the income from profit sharing paid by the subsidiary. Otherwise the company may face a high risk of the tax administrator assessing additional tax.